The premier expresses regret over the announcement of a Jewish housing project. The U.S. says the move hurt efforts to restart peace talks with Palestinians and embarrassed the vice president.

Reporting from Jerusalem — Israeli Prime Minister Benjamin Netanyahu tried Sunday to move beyond a diplomatic rift with the U.S. even as Obama administration officials reiterated their displeasure with a controversial housing project in East Jerusalem.

In his first public comments about last week's tense visit by Vice President Joe Biden, Netanyahu expressed regret for Israel's surprise announcement of 1,600 new housing units to be built on land occupied by Israel since the 1967 Middle East War.

U.S. officials say the move embarrassed Biden and jeopardized efforts to restart peace talks with Palestinians, which was a purpose of his visit to the Mideast. Last year, the administration demanded a freeze in Jewish settlements in the West Bank, and Palestinian leaders have said they would not return to the negotiating table without one.

"There was a regrettable incident, that was done in all innocence and was hurtful," said Netanyahu, who has insisted that he was unaware that the project would be announced during Biden's stay. But Netanyahu downplayed the significance of the growing tensions with the U.S. and announced no plans to suspend the project, as Palestinian and American leaders have urged him to do.

"I recommend not to get carried away and to calm down," Netanyahu said at a Cabinet meeting. "Israel and the U.S. have mutual interests. But we will act according to the vital interests of the state of Israel."

On Sunday morning U.S. TV news shows, a top administration official repeated the sense of indignation. David Axelrod, Obama's senior advisor, called Israel's move "destructive" and "an affront."

That followed a 45-minute telephone rebuke Friday by Secretary of State Hillary Rodham Clinton. The U.S. response has been one of the harshest against Israel in two decades.

Few believe the crisis has put Netanyahu's government at risk, but the prime minister's leadership skills came under attack Sunday in the Israeli media and from political opponents.

In coming days, he will find himself in the middle of a political thicket, analysts say, between the far-right parties of his coalition that don't want to slow construction in Jerusalem, and the left and moderate wings, which say Netanyahu is endangering Israel's critical relationship with the U.S.

"The prime minister has reached the moment of truth, where he must choose between his ideological beliefs and the political cooperation with the right on the one hand, and his need for American support on the other," veteran Israeli journalist Aluf Benn wrote Sunday in the Haaretz newspaper.

The issue is likely to come to a head this week when U.S. Middle East envoy George J. Mitchell is due back in Israel to discuss launching U.S.-mediated indirect talks. The Palestinians, who had agreed to participate a week ago, now say they will not take part unless Israel suspends the housing project in Ramat Shlomo.

Opposition leader Tzipi Livni chastised Netanyahu for failing to stand up to his coalition partners.

"The coalition agreement is not a substitute for a set path and a vision," she said during a Tel Aviv speech to disabled veterans. "You cannot leave national security in the hands of coalition partners, with all due respect."

In recent days, Labor Party leaders have said Netanyahu's settlement policy is making them reconsider their participation in his coalition.

Meanwhile, Netanyahu is facing pressure from conservatives, who accuse the U.S. of overblowing the crisis in an attempt to exert leverage over Israel.

Outspoken lawmaker Danny Danon said the U.S. "meddling in internal Israeli decisions regarding the development of our capital, Jerusalem, is uninvited and unhelpful."